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Dollar’s End In Sight?

Money

There has been a lot of talk about the dollar ending its status as global reserve currency.  Everytime China, Russia, or Brazil bring it up the talking heads on TV or in Washington tell us that it won’t happen.  Well, it is already beginning to be implemented in Asia.  Here is a story from Bloomberg detailing what is happening:

Yuan Deposes Dollar on China Border in Sign of Future (Update1)

By Bloomberg News

July 8 (Bloomberg) — Huang Xinyuan, who sells mining equipment and pesticides to customers across China’s border with Vietnam, says he no longer wants payment in U.S. dollars and prefers the yuan.

Sales using the greenback at Guangxi Jinbei Group, where Huang is vice president, dropped to 30 percent of contracts in 2008 from 87 percent in 2007. The yuan, which has gained 21 percent since it was allowed to strengthen against the dollar starting in 2005, offers greater stability, he said.

“In recent years, the dollar has gone in only one direction and that is down,” said Huang, 45, in his second- floor office in Pingxiang, a town set amongst karst limestone hills and sugar-cane fields in China’s southwest Guangxi Zhuang Autonomous Region, three kilometers (1.9 miles) from Vietnam. “Settling our orders in yuan removes a major risk.”

China expanded yuan settlement agreements last week from border zones to its largest financial centers, including Shanghai, Guangzhou and Hong Kong. The program is being rolled out across Malaysia, Indonesia, Brazil and Russia, all nations seeking to reduce the dollar’s role as the linchpin of world finance and trade.

The central bank first brought up the concept of a supranational currency to replace the greenback in reserves in March. It will sponsor use of the yuan in trade by arranging export tax rebates. Russia and India said the global financial crisis had highlighted the dollar’s flaws and called for a debate before the Group of Eight leaders meet in L’Aquila, Italy, starting today.

‘Raise Questions’

“It does give you an idea of what the future could look like,” said Ben Simpfendorfer, chief China economist in Hong Kong at Royal Bank of Scotland Group Plc, the fifth-biggest foreign-exchange trader. “The Chinese see an opportunity at this point to raise questions about the dollar and its status as a reserve currency.”

China, the biggest overseas holder of U.S. Treasuries, trimmed its holdings of government notes and bonds by $4.4 billion to $763.5 billion in April. Premier Wen Jiabao said in March that he was “worried” the dollar would weaken as U.S. President Barack Obama sells record amounts of debt to fund his $787 billion economic stimulus plan.

“The objective is to develop a substitute for the dollar as the world’s reserve currency,” said Tim Condon, Singapore- based head of Asia research at ING Groep NV, part of the largest Dutch financial-services group. “That will reduce the ability of the U.S. government to finance deficits with impunity.”

‘Justifiable Confidence’

Treasury Secretary Timothy Geithner said during a visit to Beijing on June 2 that Chinese officials expressed “justifiable confidence” in the strength of the American economy. China expects the greenback to maintain its role for “many years to come,” Deputy Foreign Minister He Yafei told reporters in Rome on July 5.

In Pingxiang’s Puzhai border zone, traders prefer the yuan. A parking lot that doubles as a wholesale market is jammed with container trucks with license plates from as far as Shandong, about 1,930 kilometers to the north. Garlic-laden motorcycles snake through a checkpoint to the border control.

Traders from Vietnam bring harvests of lychees and dragon fruit, departing with toys, household appliances and medical supplies to sell back home.

Luo Huiguang, 27, who sells as much as 100 tons daily of onions and garlic, collects payment in yuan wired from Vietnam.

“I prefer it to the Vietnam dong or U.S. dollar,” said Luo as he shuttled between warehouses and trucks. “There’s less hassle and we don’t need to convert the currency.”

Erase Profits

Exporters typically set prices to earn 5 percent profit on sales, so 1 percent currency transaction costs and swings in the value of the dollar can wipe out returns, Simpfendorfer said. Many businesses lack the scale to hedge foreign-exchange risks, said Huang at Jinbei, which did $50 million in trade last year.

Limited use of the yuan has been allowed since 2003 in border trade with Vietnam and Laos to the south and Mongolia and Russia in the north, according to a book published by the Beijing-based State Administration of Foreign Exchange.

The central bank extended settlement last week by offering companies in Shanghai and four southern cities tax breaks to start conducting trade in the currency with Hong Kong, Macau and the 10 members of the Association of Southeast Asian Nations, which includes Indonesia, Thailand and Malaysia.

In five years, yuan contracts may account for 50 percent of China’s trade with Hong Kong, which totaled $204 billion in 2008, according to Lian Ping, chief economist in Shanghai at Bank of Communications Co., the nation’s fifth-largest lender. They may make up 30 percent of shipments between the nation and Asean countries that last year reached $231 billion, he said.

Yuan Appreciation

“The yuan will resume appreciation next year,” Lian said. “More people will use the yuan in international trade.”

China’s central bank has limited the yuan’s gains in the past year to 0.3 percent to help support exports during the global recession. The dollar may depreciate by 5 percent annually against the currency over the next two years, ING’s Condon said. Simpfendorfer forecast the yuan will rise 5 percent to 6.5 per dollar from 6.833 by the middle of next year. The median forecast of 27 analysts in a Bloomberg survey was 6.7.

For all the concern that the dollar’s role is waning, China has continued to lead buying of U.S. assets. The greenback accounted for 65 percent of central bank reserves on March 31, up from 62.8 percent in June 2008, according to the International Monetary Fund in Washington.

‘China’s Desire’

“This is not a six-month or one-year story,” said Kenneth Akintewe, a Singapore-based fund manager who helps oversee $138 billion of assets at Aberdeen Asset Management Plc. “China’s desire to control the currency, particularly in the current environment, will supersede its ambitions for the yuan.”

China’s currency isn’t fully convertible for investment purposes. HSBC Holdings Plc, based in London, and Bank of East Asia Ltd. in Hong Kong won approval in May to be the first foreign banks to sell yuan bonds in Hong Kong.

Asian companies may be willing to accept yuan to win market share in the world’s fastest-growing economy, said Pushpanathan Sundram, a deputy secretary-general of Asean. The U.S. economy will contract 3 percent in 2009, while China expands 7.2 percent and the Asia-Pacific region grows 5 percent, according to World Bank forecasts.

“The use of the yuan may eventually boil down to simple economics,” Pushpanathan said. “Given China’s growing share in international trade, traders may find it makes economic sense to make settlements in the yuan.”

Russia, Brazil

Since December, the People’s Bank of China has provided 650 billion yuan ($95 billion) to Argentina, Belarus, Hong Kong, Indonesia, Malaysia and South Korea through so-called currency swaps, encouraging its use in trade and finance. Russia and China agreed to expand use of the ruble and yuan in bilateral trade on June 17. Brazil and China began studying a similar proposal in May.

Converting payments to a third currency “seems to be unreasonable” when Chinese partners are both supplying equipment and buying processed raw materials, said Pavel Maslovsky, deputy chairman of Peter Hambro Mining Plc, Russia’s second-largest gold producer. It develops iron ore projects in the Amur region bordering China.

“The Chinese economy is in such a shape now that their project to export yuan may turn highly efficient,” said Eduard Taran, chairman of OOO RATM Holding, a Siberian cement producer also considering buying Chinese machinery in yuan and exporting output in the currency.

About 160 kilometers north of Pingxiang, yellow cranes jut skywards from a dusty 3 square-kilometer construction site in the provincial capital of Nanning. The plot will house trade missions and businesses from the Asean countries.

“Many countries view China as the savior in this global economic crisis,” said Pan Hejun, vice-mayor. “It’s natural that other countries will be willing to use the yuan to settle trade and hold it among their reserves.”